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Summary

  • Transocean Ltd released its second-quarter results on August 5th. The company beat the street expectation with an impressive net revenue of $587 million and earnings of 1.61/sh.
  • The company is performing well, despite many headwinds due to a general and persistent softness of the floaters and jackups market.
  • As a long investor, it is crucial to look over these unavoidable economic cycles and seize the opportunity to accumulate when the value is definitely present.

Source: Deepwater Nautilus, RIG website.

Transocean Ltd. (NYSE:RIG), is one of the top-tier offshore drilling companies, which owns a very large fleet of floaters and jackups.

The company owns a total of 27 high specification floaters: Ultra-deepwater rigs; 12 high specification floaters: Deepwater rigs; 7 high specification floaters: Harsh environment; 21 Mid-water floaters; finally, 11 high specification jackups. It is a total of 77 active rig units. Furthermore, 14 more rigs are under construction, at the moment, and scheduled to be coming on-line as early as mid-2014. (7 are already contracted.)

Complete fleet status as of August, 2014.

Link: July fleet status.

1 - Rigs under construction.

#RIGK feetContract StartContract End

Dayrate

K $

Location
Ultra-deepwater Drillships
1DeepWater Asgard12/40Starting operation now per the CCQ3/14-Q2/17600TBA
2DeepWater Invictus12/40Q2/14Q3/14-Q2/17595US GOM Billiton
3DeepWater Thalassa12/40Q1/16Q1/16-Q4/25519TBA Shell
4DeepWater Proteus12/40Q2/16Q2/16-Q2/26519TBA Shell
5DeepWater Pontus12/40Q1/17Q1/17-Q4/26519TBA Shell
6DeepWater Poseidon12/40Q2/17Q2/17-Q2/27519TBA Shell
7DeepWater Conqueror12/40Q4/16Q4/16-Q4/21599US GOM Chevron
8JSPL Ultra-deep TBN 112/40TBAAvailable--
9JSPL Ultra-deep TBN 212/40TBAAvailable--
High specification Jackups
1KFELS High Sp Jackup TBN 1400/35TBAAvailable-
2KFELS High Sp Jackup TBN 2400/35TBAAvailable-
3KFELS High Sp Jackup TBN 3400/35TBAAvailable-
4KFELS High Sp Jackup TBN 4400/35TBAAvailable-
5KFELS High Sp Jackup TBN 5400/35TBAAvailable-

2 - High specification floaters: Ultra Deepwater.

High Specification Floater

Ultra Deepwater Rigs

7,500'/12,000'-30,000'/40,000'

Year builtShip or Semi

Contract

End

Current

Dayrate

K $

Location
1Discoverer Americas2009Ship3/16735Other sub-saharian
2Discoverer Champion2011Ship11/15677US GOM
3Discoverer Clear Leader2009Ship9/14-9/18571/590US GOM
4Discoverer Inspiration2010Ship3/15-4/20527/585US GOM
5Dhirubhai DW KG12009ShipEn-route to Brazil until Q2/16 with Petrobas440India and Middle East (-> Brazil)
6Dhirubhai DW KG22010Ship2/15510India and Middle East
7Discoverer India2010Ship9/16-11/20528-508US GOM
8Petrobras 100002009Ship8/19435South America
9Discoverer Deep Seas2001Ship11/16595US GOM
10Discoverer Enterprise1999Ship10/14615US GOM
11Discoverer Spirit2000Ship6/14557

US GOM

12GSF C.R Luigs2000Ship6/14580US GOM
13GSF Jack Ryan2000Ship7/14445North Africa and Mediterranean
14Deepwater Discovery2000Ship7/14461Nigeria
15Deepwater Frontier1999Ship8/14565Australia
16Deepwater Millenium1999Ship4/15-4/16600-611Australia
17Deepwater Pathfinder1998Ship4/15680US GOM
18Deepwater Expedition1999Ship11/14650India and Middle East
19Cajun Express2001Semi11/14-11/15600-495North Africa and Mediterranean
20Deepwater Nautilus2000Semi8/17533US GOM
21GSF Explorer72/98Ship7/14412US GOM
22Discoverer Luanda2010Ship1/18470Angola and Namibia
23GSF Development Driller I2005Semi-IdleUS GOM
24GSF Development Driller II2005Semi4/14606North Africa and Mediterranean
25Development Driller III2009Semi11/16428US GOM
26Sedco Energy2001SemiRig swap with GSF Rig 135-9/15New 365Other sub-saharan
27Sedco Express2001Semi4/14-10/14600/455Nigeria

3 - High specification floaters: Deepwater.

High Specification floater: DeepWater (12)

4,500-7,200'/25,000'

Year builtShip or Semi

Contract

End

Current

Dayrate

K $

Location
1Deepwater Navigator2000Ship2/16374South America
2Discoverer Seven Seas1997Ship7/14-9/14500-400South Asia
3Transocean Marianas1998Semi3/15370

Other sub-saharan

4Sedco 7062008Semi5/14361South America
5Sedco 7022007Semi2/16461Nigeria
6Sedco 7071997Semi11/14394South America
7GSF Celtic Sea1998Semi9/14328Angola and Namibia
8Jack Bates1997Semi5/14380Australia
9M.G Hulme Jr1996Semi-IdleIndia and Middle East
10Sedco 7102001Semi-StackedNorth Africa and Mediterranean
11Transocean Rather1988Semi-StackedSouth Asia
12Sovereign Explorer1984Semi-StackedIndia and Middle East

4 - High specification semi-submersible: Harsh environment.

High Specification floater: Harsh environment (7)

1,500'-10,000'/25,000'-30,000'

Year builtShip or Semi

Contract

End

Current

Dayrate

K $

Location
1Transocean Barents2009Semi8/14-8/15587Norway
2Transocean Spitsbergen2010Semi7/15547Norway
3Henry Goodrich2007Semi6/15346-476Canada
4Transocean Leader1997Semi3/15410Norway
5Paul B. Loyd,JR1990Semi3/15441-447UK
6Transocean Arctic1986Semi1/16415-519Norway
7Polar Pioneer1985Semi6/17620-589Norway

5 - Midwater floaters.

Midwater floater: (21)

1,000'-3,600'/25,000'

Year builtShip or Semi

Contract

End

Current

Dayrate

K $

Location
1Sedco 7001997Semi-StackedSouth Asia
2Transocean Legend1983Semi4/14-11/14293-425Australia
3Transocean Amirante1997Semi-IdleNorth Africa and Mediterranean
4GSF Arctic I1996Semi-StackedNorth Africa and Mediterranean
5Transocean Driller1991Semi7/16264South America
6GSF Rig 1351983Semi(Rig swap with Sedco Energy)N/AOther sub-saharan
7GSF Rig 1401983Semi9/14-Stacked260India and Middle East
8GSF Aleutian Key2001Semi-StackedOther sub-saharan
9Sedco 711 (1)1982Semi6/14-10/15350-366UK
10Transocean John Shaw (1)1982Semi12/14-12/15361-416UK
11GSF Arctic III (1)1984Semi4/14-9/14336-411UK
12Sedco 712 (1)1983Semi4/14-10/16380-409UK
13Sedco 714 (1)1997Semi3/14-2/16400-445UK
14GSF Grand Banks1984Semi9/15409Canada
15Actinia1982Semi7/15190India and Middle East
16Sedco 6011983Semi-StackedSouth Asia
17Transocean Winner1983Semi7/15-7/16458-499Norway
18Transocean Searcher1988Semi5/15396Norway
19Transocean Prospect (1)1992Semi5/14-5/15425-376UK
20J W. McLean (1)1996Semi-StackedUK
21Sedco 704 (1)1993Semi2/16374UK

(1) Caledonia Offshore Company spin-off (8 rigs.)

The offshore drilling assets currently contemplated for transfer to Caledonia include the following rigs: Sedco 704, Sedco 711, Sedco 712, Sedco 714, Transocean John Shaw, Transocean Prospect, GSF Arctic III and J.W. McLean.

Regarding Caledonia Offshore Drilling, the UK North Sea focused drilling company announced during the quarter, we have no additional updates at this time. We expect to establish this new entity during the second half of 2014 and at an appropriate time separate it fully from Transocean. We have maintained full flexibility to pursue all options, including the potential direct sale to public or private buyer, a spin or a public offering. (Said Isa Ikaheimonen at the last CC.)

6 - High specification Jackups.

High Specification Jackup: (11)

350'/400'-30,000'/35,000'

Year built

Contract

End

Current

Dayrate

K $

Location
1GFS Constellation I20031/16150South Asia
2GFS Constellation II20047/15165Other sub-saharan
3GFS Galaxy I200110/14-4/17216UK
4GFS Galaxy II19986/14-1/15192-221UK
5GFS Galaxy III19995/14-7/17226-180UK
6

Transocean Honor

20124/15153Angola and Namibia
7GSF MagellanXXXX
8GSF Monarch19869/14-3/15167-169UK
9Transocean Andaman20135/16145South Asia
10Transocean Siam Driller20133/18139South Asia
11Transocean Ao Thai20139/18135South Asia

Fleet analysis snapshot.

1- Rig Fleet per category:

TotalUDW

Deepwater

semi-subs

HE Deepwater Semi-subs.MidwatersJackups
Number of Rigs77271272110
New rigs1427--

5

2- Rig Fleet per region:

Total

Angola

AustraliaCanadaIndia and Middle East (Brazil)NigeriaNorth Africa and Medit.Norway

Other Sub/

saharan

South AmericaSouth Asia

US

GOM

UK
UDWs271203230210130
Deepwaters12110211013200
Semi-subs7001000500001
Midwaters21011202221208
Jackups10100000010404
Total7634273676581313
Idle4000101010010
Stacked8000102010301

* GSF Rig 135 has been swapped with Sedco Energy (indicated at the conference call.) Now, GSF Rig 135 is classified here as idle until contracted again soon; however, it appears that this new contract is a done deal ready to be announced quickly per Terry Bono, SVP marketing:

In addition we recently executed a rig swap agreement between the Sedco Energy and GSF Rig 135. We should be announcing more positive news on the 135 shortly.

3 - Rig dayrate range:

Terry Bono, SVP marketing gave a general dayrate per category and per location at the conference call;

But we had previously reported and certainly in our last presentations on the road, I think the ultra-deepwater ranges reported were 375 to 500, deepwater was around mid-300s to 400s, mid-water was I think around mid-300s to 400s in the harsh environment and below 200 outside of U.K.

Second-quarter 2014 results snapshot.

Link: Conference call transcript on August 7, 2014.

Link: Pr second-quarter 2014 results, on August 6, 2014.

Q2 2014Q1 2014
Revenue in $ Million2,3282,339
Net Income in $ Million587456
Operating and maintenance expenses in $ million1,2131,269
Fleet revenue efficiency in %9595.7
Earnings per share in $1.611.25
Interest expense in $ million112126
G & A in $ Million6357
Shares Outstanding basic in Million262262
Backlog as of August 2014 in $ Billion (Versus April 17, 2014) (2)27.0826.11
Cash and Cash equivalent in $ Million2,1171,987
Long-term Debt $ Billion (1)10.46
Stock price August 14, 2014 in $38.88
Enterprise Value $ Billion22.32
EBITDA $ Billion3.90
EV/EBITDA5.72

(1), Regarding the balance sheet, we continue to work towards reducing our gross long-term debt to below $9 billion.

(2) Terry Bono, SVP Marketing, said at the CC: "We increased our contract backlog by 75% over the first quarter, demonstrating the Company's solid position in this very challenging market."

Note: The ratio EV/EBITDA is very low, which means that RIG has a good and manageable debt level which will allow for newer rig purchase down the road to renew its aging fleet. Seadrill Ltd. (NYSE:SDRL) which has one of the most modern fleets has an EV/EBITDA reaching 11 right now.

YTD chart:

RIG Chart

RIG data by YCharts

Commentary:

Transocean Ltd. Is one of the biggest and the oldest top-tier offshore drilling companies, with probably around $9.5 billion in total revenue for 2014.

The company continues to deliver outstanding positive results, quarter after quarter, whereas the analyst community exaggerated bearishness, keeps on beating up the Industry with negative and sometimes blatantly incorrect financial assumptions, in my opinion. The recent example of this dismissive and unwarranted action against the Offshore drilling industry, is the last sector brutal downgrade issued by Deutsche Bank analyst, Mike Urban.

My ultimate goal is not to discuss in-depth the validity of this downgrade which is totally unjustified, but preferably, give the reader enough compelling data to make a personal and honest assessment of the situation; and judge, first hand, what is pure fiction and what is reality?

At the last conference call, Terry Bono, SVP marketing, explained succinctly what sort of headwinds the Industry is actually facing. A definitive market softness is being experienced by all the players in the offshore drilling sector, and it is still difficult to indicate an end of this weak cycle. After analyzing many different companies, I believe the real turnaround will be Q3 2015.

Another important topic, which has been debated almost on a monthly basis, is the dividend level and its sustainability. Few analysts once more have suggested that the dividend will have to be reduced or even temporarily cancelled due to the continuing depressed market, and so far, after over a year, they are still wrong. Again, this topic came back at the conference call, and the question was asked by Angie Sedita, UBS, and was answered by Steven Newman, CEO:

But as both I and Esa commented in our remarks, we are committed to maintaining a competitive and sustainable dividend. So that's very important to management and the Board.

What we can say is that the dividend is pretty safe, and it would take some extraordinary circumstances to change this standard paradigm. It is contrasting again with the Deutsche Bank analyst, Mike Urban, who predicted a forced cut in dividend as one justification for his broad downgrade of the sector and for RIG, particularly.

Some specialists are asserting that RIG still has room for a dividend increase that I am not advocating at all at the moment.

RIG is trading now at a large discount level while reporting $2.33 billion in revenue and $1.61 per share whereas analysts' expectation was for $2.27 billion and $1.12 earnings per share. I believe the stock is trading at a discount to its true fair value which I estimate to be between $48 to $50, and despite the two or three coming quarters which are considered as tough, because of more idle time and mobilization time. I am expecting earnings of 0.81/0.85 per share for the next Q3 2014.

Finally, we will find out soon, what will be decided with Caledonia Offshore? If we look at what Noble (NYSE:NE) did with Paragon (NYSE:PGN) recently, I would be interested to see Caledonia spun off and a special share dividend to be distributed to all RIG shareholders. I believe this situation may bring more value for investors, and the new company will be totally autonomous and will trade separately.

I am rating RIG as a BUY accumulates, especially when we look at the 7.5% dividend.

Disclosure: The author is long RIG, SDRL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Transocean Ltd: Complete Fleet Analysis As Of August 2014, And Recent Second Quarter Results